Question 3 |[15 marks]

Suppose the wage (w) is $20 and the price of coal (p) is $40 and a representative firm in the textile industry has two types of technologies available with a goal to produce one unit of cloth:

	Labour (L)	Coal (R)
Technology A	8 units	4 units
Technology B	2 unit	12 units

1. Calculate the production costs required for the two types of technology. Which technology would a firm choose? (2 marks)

Tech A

Tech B

b. Write down the equation of the isocost line for each technology. Make R the subject of the equation. (2 marks)

c. Draw the two isocosts on a diagram. Indicate Technologies A and B and the relative input price. (2 marks)

d. Suppose the wage increases to $30 per unit and the price of coal decreases to $15 per unit. Calculate the new production costs for the two types of technology. Which technology would a firm choose? (2 marks)

e. Write down the equation of the isocost line for each technology after the change in the relative input price ratio. Make R the subject of the equation. (2 marks)

f. Draw the new isocosts on the same diagram and indicate the relative input price ratio. (2 marks)

g. Write down the equation to calculate the innovation rent. How much is the innovation rent? (3 marks)